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Morningstar | Growth Moderates in C.H. Robinson’s Q4 as Truckload Capacity Crunch Eases, but Execution Solid

Wide-moat logistics specialist C.H. Robinson’s fourth-quarter gross revenue increased 4.5%, slightly below our expectations due to lower-than-anticipated truckload brokerage load volume in the core North American Surface Transportation (NAST) division. That said, NAST's gross profit margin percentage expanded more than we expected, as rates paid to truckload carriers for capacity fell year over year while pricing to shippers increased. This dynamic pushed net revenue growth above our forecast. Overall operating profitability was mostly in line and continued to benefit from solid headcount management and increased net revenue.

Since our midcycle revenue and profitability assumptions remain mostly intact, we don’t expect to materially alter our $83 fair value estimate. As we incorporate full-year 2018 financials into our model, we expect any fair value estimate adjustments to be modestly upward. As of market close on Jan. 30, the shares are appropriately valued, in our view. Throughout much of 2018, C.H. Robinson was trading in modestly overvalued territory, but valuations across the third-party logistics space eased by year-end, partly because investors recognized that the highly favorable operating backdrop for asset-light highway brokers (in terms of capacity disruption, strong contract pricing, and robust spot opportunities) would normalize in 2019 following the historic truckload capacity crunch, translating into much more moderate net revenue and EPS growth. Of note, this dynamic has long been baked into our fair value estimate.

In terms of highlights, fourth-quarter quarter net revenue (gross revenue less transportation costs) in the core NAST division, which includes the flagship truck brokerage unit, increased a healthy 13.5% year over year; it was up more than 17% for the full-year 2018. NAST net-revenue expansion came in solidly ahead of segment gross-revenue growth (which was up 6%) as gross profit margin expanded 110 basis points, to 17%.

The lingering benefit of solid contractual pricing gains over the past year kept NAST's average sell rates to shippers positive on a year-over-year basis (up 1.5%), while rates paid to truckers declined 1% as the industry capacity crunch eased in the quarter. Because the firm passes along lower carrier rates on a lag to committed/contractual shippers, gross margins expanded. Of note, the 1.5% rise in sell rates represents a material moderation from the high-teens average posted in previous quarters, but comparisons have become quite difficult--truckload-market capacity tightened drastically in fourth-quarter 2017, driving C.H. Robinson’s rate per mile (ex fuel) charged to customers up an astonishing 15%.
Global forwarding segment net revenue increased a solid 12% on the back of new business wins and solid pricing on ocean freight business and a favorable mix shift for air freight business.

C.H. Robinson’s consolidated operating margin (calculated off net revenue) increased 240 basis points to 35.8%. NAST's operating margin increased 130 basis points to 44.8%--despite continued increases in variable incentive compensation--thanks to leverage from net revenue growth as well as productivity gains (solid headcount management) rooted in heavy IT investment in recent years. C.H. Robinson continues to invest very heavily in IT infrastructure with the aim of boosting productivity (e.g., automating more of the freight transaction) and leveraging data analytics to more efficiently match shippers and carriers in a vastly fragmented marketplace.

Global air and ocean forwarding margins improved in the quarter, with help from net revenue growth and employee productivity gains. Robinson Fresh (produce sourcing activities and related transportation) margins increased nicely thanks to expense control and truck-transportation pricing gains.